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Why is Singapore dollar strong and SL rupee weak?

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by Jayampathy Molligoda

Inflation is too high in Sri Lanka; people are finding it unbearable. How can we control the inflation from further slipping?

Singapore experience and structure of our CBSL:

 Singapore has the Monetary Authority Singapore (‘MAS’) as their Central Bank, where in Sri Lanka, we have the Central Bank of Sri Lanka (which is not a body corporate in legal terms) and within the CBSL, they have the ‘Monetary Board’. Basically, the Singapore Central Bank (MAS) has managed to keep the inflation under control even during this period of global economic recession, where most of the other countries have not been able to contain the inflation. The Singapore used the exchange rate to influence inflation, not the other way around.

 Our view is that there must be a sound, practical and legal mechanism guaranteeing the independence of the CB whilst making the CBSL accountable and transparent as in the case of MAS. John Exter, the founding Governor of the Central Bank of Ceylon, in his report stated that Governor of the Central Bank should be of unquestioned integrity and responsibility. This is very critical because an independent CB is essential for maintaining price stability, meaning containing inflationary pressure.

 As for maintaining the price stability objective, the simplest test is whether CB can continue to resist demands from the government of the day to print money and/or continue to maintain low interest rate regime when a higher interest rate is necessary to maintain price stability. This is because the government of the day would naturally tend to push economic growth rates to run at a faster rate than its capacity limit permits and their desire to incur budget deficits try to secure funds by borrowing from CB. Ours is somewhat politicized.

 However, the reality is most of the economic activities will come to a grinding halt if CBSL doesn’t print new money for the government. Besides the suffering of the people on the road, non- repatriation, avoiding sovereign breaches, not letting money market domino effect failure, payment to foreign parties, all of these have to be considered. No salary payments to government servants for a particular month if money printing is stopped.

Why can’t our CB do the same thing as MAS?

 Sri Lankan situation is totally different because it has a persistently high ‘twin deficits’ meaning (1) government budget deficits since independence and (2) BOP current account deficit with rest of the world. And CB has been compelled to resort to ‘money printing’ more that the required/ desired level and continue to borrow, thus increasing foreign debt service beyond unsustainable levels.

 The real issue has been that our Exports as a % of GDP has come down from closer to 28% in four to five decades to 12% especially since 2014 to date. Now GDP real per capita is coming down. We were boosting US $ 25 billion has increased to US $ 75 billion within 10 years, but it was through services and high spending on infrastructure development without corresponding increases in return on such investments by way of increased exports.

CBSL policy towards curbing inflation:

 Since August 21, CB has been trying to control inflation by way of increasing bank interest rates through increasing CB rates and Statutory reserve ratios (tightening the monetary policy accelerated wef March 22, however. this badly affects SMEs – the micro and small and medium enterprises have serious issues in the area of access to financial facilities or in simple terms, borrowing costs are so high that they cannot afford to borrow any more. Depending on whether the marketable – products of these businesses are in the “buyers; market’ or “sellers’ market” they could either survive or eventually collapse- only the ‘rich’ become richer (only in certain sectors) because they are in possession of own surplus money – they earn a substantial amount as interest income at current deposit rates and also have the option of keeping dollars without repatriation as stipulated in the relevant directives issued under Monetary Law Act of 1949. This is despite the rupee exchange rate was allowed to be flexible and floated from Rs 203/ per $ and now it’s Rs 368/.

  Further, during the period 2019 till august 2021, the private sector was benefited under low tax rates and low bank interest regime, where they borrowed rupee loans at 4-6 %, otherwise the exporters were compelled to go for $$ packing credit for financing export orders. In my view, our private sector is smarter than the government policy makers and some top officials in the financial/banking sector. It was the private sector who insisted that SL rupee should be floated not even a “managed float currency policy. Are we now getting the export proceeds according to the applicable regulations and if not, does the CB strictly enforce penalties for non- compliance?

Two News items published on 29/07/22:

“Earnings from merchandise exports increased by 20% Y-o-Y to USD 1,208.2 Mn in June 2022 as per data released by Sri Lanka Customs, mainly due to increase in earnings from export of Apparel & Textiles (1/2)”

  “World Bank does not plan to offer new financing to Sri Lanka until an adequate macroeconomic policy framework is in place – WB”

 Sri Lankan Export industries such as textile and apparel, tea sub sector, minor export crops, etc., should be able to be more competitive in the global market place due to the policy of currency depreciation wef 7 March 22 from Rs 203/-  to around Rs 368 (at present), but the associated local costs including the import content of the export value chain and the additional costs due to difficulties in ‘doing business’ under current conditions tend to move up sharply in the near future, thus eroding the cost competitiveness enjoyed by our exporters. As for doing business, one of the most critical current issues has been the shortage of fuel. It is in that context only the importance of making available sufficient FOREX income, be set aside for importation of fuel on a monthly basis, say US$ 300 million, should be viewed. Now that the backlog of LCs being cleared and most of the payments have been made and the incoming $$$ are now being reserved, it is important to set aside a part of export proceeds towards meeting fuel bills on a monthly basis.

Vital information on ‘FOREX’ monitoring not made available yet:

Stemming from the above argument, the CB’s priority number one should be to ensure whether export proceeds in dollars are received within the stipulated timeframes and in accordance with the directives issued under Monetary Law Act of 1949. In fact, the CB mandate by law is ensuring price stability and financial system stability and management of FOREX is the critical success factor here.

In August 21, then Governor Prof WDL appointed a working committee and liaised with customs and started putting in place the EPMS. (As far as direct documentation of export (‘cusdecs’) is concerned, the commercial banks do not receive those docs and what they can monitor is what they actually receive as proceeds only, that’s why this ICT system is needed.)

 It seems that export proceeds monitoring system (EPMS) is still not functioning at CB level. Also, CB doesn’t provide the information on actual amounts of foreign exchange proceeds received on a monthly basis.

According to the Governor, CB, only about 20% of the FOREX is getting converted in to the banking system out of US$ 1,000 million export proceeds per month. It is not clear how much has actually received within the ‘180 day rule’ on a monthly basis AND how much converted.

The present Governor, CB is now making an appeal to exporters to remit all export proceeds and convert at least 50% of the proceeds after keeping $$ for ‘eligible expenditure’. It is expedient for the CB to advise the government to set aside (out of monthly export+ direct remittances) at least US$ 300 million per month for petroleum product imports and only the deficit if any, be funded through credit lines. In the meantime, our renewable energy sources must be explored with a view to reducing dependence on diesel and petroleum inputs.

 Apparently, the Strategy adopted by the Ministry of Finance on 12 April 22 by pre-emptive debt defaults announcement has created some negative sentiments as well. Fuel imports can only be done through advance payments. LCs cannot be opened without paying an advance as most of our banks are considered untrustworthy customers in the international trading operations.

Light at the end of the tunnel: 

We are into a vicious economic cycle. What is really worrisome is that there seems to be no serious process of problem identification by following a more scientific ‘research methodology’. First and foremost, we need to find out what went wrong? Some kind of a truth commission is needed. Our policymakers together with the private sector, the government and Opposition politicians all must get together to find out what went wrong without ‘blame assigning game’. Our policymakers must learn to admit that we don’t know fully the reasons, until a detailed analysis is done. No sustainable solutions can be expected in a situation where we all have full of ‘beliefs’ -some may be true others false, therefore the real facts need to be separated out from mere opinions based on beliefs although belief is the starting point of any intellectual thought process as claimed by world renowned philosopher, Bertrand Russell. No point in blaming politicians only – maybe as national leaders they have failed to provide transformational leadership and inspire other stakeholders to drive the economy. Also, successive governments have not created conducive environment for private sector to do business and improve economic welfare of the people, otherwise, it is the private sector that is managing the economy; at least 70% of the economic activities are undertaken by the private sector. Our private sector is capable of driving the businesses as ‘engine of growth’ for national economic development.

 What can the government do under the current circumstances?

The solution is for the government authorities to follow one important process, undertake some research using scientific methods to ascertain why we have failed. It is suggested the government appoint an ‘expert panel’. It should come out with immediate, short and medium- term strategic plan based on a long-term vision. But who is going to appoint this expert panel and who are the members? Ideally, it has to be a Presidential commission.

Treasury does not have any money at all and when CPC is held up with no payment to banks. That is why our economists have been advocating stringent fiscal measures be enforced by the government so that the government expenditure could be drastically reduced. Most of the state- owned enterprises (SOEs) need to be restructured by liberalising the sectors and put in place a more transparent system to look for ‘PPP projects’ to drive economic activities using under- performed state assets. However, these measures need to be taken after a due process of obtaining the final recommendations of the Presidential commission.

Social unrest, achieving political stability and economic revival:

What we have discussed up to now pertains to our economic problems, but we have major issues in socio-political arena. We need to admit that there are a number of genuine grievances coming out from the ordinary people and also a mass uprising against corruption and mismanagement of the governments, although no concrete evidence is forthcoming to justify these claims, that’s why the truth commission findings are important. On the other hand, there is this conspiracy theory that some unexplained, hidden and most powerful forces operating outside Sri Lanka are at work -may be trying to weaken the “STATE” and portray Sri Lanka as a failed state as articulated by the Head of SIS at a high- level meeting chaired by the President Ranil Wickremesinghe. Surely, there must be some valid reasons for the government under President, GR to adopt a ‘soft’ policy. We don’t know the ‘real things’ yet.

We have been hearing as a slogan that political stability is a prerequisite for achieving much needed economic growth and revival. However, the writer is of the view that in today’s context, it should be other way around. If the government of the day cannot provide basic needs of the people, at least fuel without people waiting in long queues, it will not be possible to restore political stability, and social unrest could further accelerate. That’s why some kind of economic revival is needed to fulfil ‘basic needs’ of the people to restore some kind of ‘political stability’. Otherwise this so-called ‘political stability’ becomes a mere superficial phrase.

In the meantime, it is the responsibility of the government of the day to uphold the constitutional provisions to the letter and spirit as stipulated in the Constitution of the Democratic Socialist Republic of Sri Lanka.

The authorities need to respect the different views of the people without resorting to suppress people’s non-violent socio-political movements, whilst maintaining law and order to safeguard the peoples’ sovereign rights guaranteed under our Constitution.



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Opinion

Need for best relations with China

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(This letter was sent in before the announcement of the government decision to allow the Chinese survey vessel to dock at Hambantota – Ed.)

I once met Pieter Keuneman sometime after he had lost the Colombo Central at the general election of 1977. We met at the SSC swimming pool, where he had retreated since his favourite haunt at the Otters was under repair. Without the cares of ministerial office and constituency worries he was in a jovial mood, and in the course of a chat in reference to a derogatory remark by one of our leaders about the prime minister of a neighbouring country, he said, “You know, Ananda, we can talk loosely about people in our country, but in international relations care is needed in commenting on other leaders”.

Pieter, the scion of an illustrious Dutch burgher family, the son of Supreme Court judge A. E Keuneman, after winning several prizes at Royal College, went to Cambridge in 1935. There he became a part of the Communist circle, which included the famous spies Anthony Blunt, later keeper of the Queen’s paintings Kim Philby, and Guy Burgess. Eric Hobsbawm, the renowned historian commenting on this circle, wrote of the very handsome Pieter Keuneman from Ceylon who was greatly envied, since he won the affections of the prettiest girl in the university, the Austrian Hedi Stadlen, whom he later married. Representing the Communist Party in parliament from 1947 to 1977, soft-spoken in the manner of an English academic, Pieter belonged to a galaxy of leaders, whose likes we sorely need now.

I was thinking of Pieter’s comments considering the current imbroglio that we have created with China. Our relations with China in the modern era began in 1953, when in the world recession we were unable to sell rubber, and short of foreign exchange to purchase rice for the nation. The Durdley Senanayake government turned to China, with which we had no diplomatic ties. He sent R G Senanayake, the trade minister, to Peking, where he signed the Rice for Rubber Pact, much to the chagrin of the United States, which withdrew economic aid from Ceylon for trading with a Communist nation at the height of the Cold War.

Diplomatic relations with China were established in 1956 by S W R D Bandaranaike, and relations have prospered under different Sri Lankan leaders and governments, without a hint of discord. In fact, in addition to the vast amount of aid given, China has been a source of strength to Sri Lanka during many crises. In 1974, when the rice ration was on the verge of breaking due to lack of supplies, it was China, to which we turned, and who assisted us when they themselves were short of stocks. In the battle against the LTTE, when armaments from other countries dried up, it was China that supported us with arms, armoured vehicles, trucks, ships and aircraft.

It was China and Pakistan that stood by our armed services in this dire crisis. More recently, amidst the furore, created by Western nations about human rights violations, China was at the forefront of nations that defended us. A few weeks ago, it was reported that the UK was ready with documents to present to the UN Security Council to press for war crimes trials against the Sri Lankan military, but the presence of China and Russia with veto powers prevented it from going ahead with its plan.

It is in this context that we have to view the present troubles that have engulfed us.President Ranil Wickremesinghe, in the short period he has been in office, has won the sympathy of people by the speed with which he has brought some degree of normalcy, to what was a fast-disintegrating political environment. On the economic front, his quiet negotiations and decisions are arousing hopes.

A shadow has been cast over these achievements by the refusal to let in the Chinese ship to Hambantota, a decision made on the spur of the moment after first agreeing to allow it entry. The manner in which it was done is a humiliation for China, one administered by a friend. We must remember that these things matter greatly in Asia.

These are matters that can be rectified among friends, if action is taken immediately, recognising that a mistake has been made. The President should send a high-level representative to assure the Chinese leadership that these are aberrations that a small country suffers due to the threats of big powers, to smoothen ruffled feelings, and normalize relations between two old friends. The American-Indian effort to disrupt a 70-year old friendship, will only lead to its further strengthening in the immediate future

ANANDA MEEGAMA

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Opinion

A change of economic policies for Sri Lanka

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Millions of Sri Lankans are anxiously waiting to see what actions will be taken to make life bearable again.If we follow the example of successful countries we see them exploit their opportunities, and use the wealth created, not to import cars and go on luxury trips abroad, but to re-invest the money proceeds in further projects to bring in even more money. They proceed in this way until their citizens have good standard of living. Probably, the best example of that compounding of wealth is Singapore.

Singapore exploited its geographic advantages. It provided cruise ships with bunkering services and repair, later they provided airlines with refueling and expanded that to one night free stop- overs for passengers to buy luxury goods at their glamorous, tax-free shopping malls. The Japanese were making wonderful new gadgets: cameras, music players, portable radio cassette players, binoculars, all available in the malls and sold tax free!! Lee Kuan Yu forbade the ladies to wear denim jeans, and to wear dresses with hem lines coming down two inches below the knee! He even instructed the ladies to smile! No man could have long hair for fear of arrest. Littering was prohibited, so was chewing gum and smoking butts on the roads and pavements. The place was kept clean!

They used the proceeds arising from all this commercial activity to build housing blocks, develop new roads and other beneficial projects. (Individuals were not allowed to walk away with the profits, just to fritter them away.) Sentosa Island had installed a communications dish antenna connecting it with New York and the financial markets. This was an example of intelligent seizing of opportunities. I account for this intelligent development as due to the high educational and knowledge of Singapore’s progressive management. The result is a firm currency, holding its value.

Something similar has happened to Russia. Russia is rich. It is under progressive intelligent management. Stalin had developed the railway network across the full eleven time zones. But many areas remained to be connected. Putin found the finances to develop coal mines, develop oil and gas deposits and build railway bridges and tunnels for better access to markets and their demand for Russian products. Even as you read this, trains of 70 plus trucks, each with 70 tons of coal are grinding their way to China, day and night. Gas is flowing through an extensive network of pipelines, both east to China and west to friendly countries in Southern Europe. Mr. Putin and his men have succeeded in getting Russia fully functional. And the more Russians there are to spend money, so the more demand for goods and services: shops, etc., providing multiplying employment in Russia.

Mr. Putin wants to build a road and rail link south through Iran to India. A design plan is in the works. It is being discussed with Iran and India. Putin is displaying initiative for the benefit of Russia and its citizens. Putin cares for the citizens of Russia and is creating both wealth and jobs too. Architects are designing attractive living spaces and buildings which provide a better environment for Russians and contractors are building it. Education of Russian citizens is playing a big part in Mr. Putin’s thinking, too. Russia needs a talented workforce.

The result is that the currency, the Ruble is strong and does not devalue. It keeps its value.Belarus, Russia’s neighbour, can also be praised for outstanding development. The population in the big towns is cossetted with amenities and facilities which provides a luxurious way of life for townspeople especially those with industrial jobs. However, it must be admitted, the standard of life for the minority 30% population living in the countryside has yet to catch up. The administration is strict and everyone is law abiding. For example, you can leave your hand phone at your seat while you visit the toilet conveniences and it will remain undisturbed until you return.

Belarus, being a mostly agricultural country has a big tractor manufacturing plant, it has a fertiliser mining and producing plant, it has a commercial vehicle plant, DK MAZ which produces industrial trucks such as fire extinguishing trucks and also produces the most comfortable, bright, low step buses and so on, and of course, Belarus makes its own industrial vehicle tyres. The towns are prosperous and clean and Minsk, the capital is a beautifully laid out city. Town apartment blocks are multi-storied living spaces, but are so well designed and fitted as to provide pleasant living spaces for its people. These reduce urban sprawl across the wooded countryside.

What are Sri Lanka’s strengths? It is a small island thus making communications short and sweet. Its location in the Indian Ocean is a plus, its scenic beauty is a plus allowing a thriving tourist trade for people from colder climates, and its soil and climate allows almost anything to be grown. Therefore its agriculture is a great strength. Its long coastline can provide fish if the fisherised. It has deposits of graphite and phosphates which can be exploited to produce profits for further investment in development projects. It has its illiminite sands which are an extremely valuable asset but need to be controlled and exploitation expanded. It has a whole gem mining industry which need to be managed in way beneficial to the government. It has several government owned businesses which need to be overhauled and modernized to convert losses to profits. The rupee in 1948 was equal to the English pound, now it is around 450 rupees to the Pound. That gives a good description of Sri Lankan past governance.

Profits from projects need to be ploughed back into further projects to bring about a higher standard of living for all its inhabitants. Then the Lankan reputation of being a paradise island with happy people will be restored.

Priyantha Hettige

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Opinion

Sapugaskanda: A huge challenge for RW

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It will be interesting to see if anything fruitful will come of the so-called “investigation” announced by the Minister-in-charge, about what seemed like an outrageous overtime payment to the petroleum refinery workers.While waiting for the outcome of that investigation, I thought of highlighting again the real and central issue that cuts across all loss-making government undertakings in Sri Lanka, such as the CPC, CEB, SriLankan Airlines, etc. that have been mercilessly sucking off tax-payer’s money into them like “blackholes”.

These organisations have been typically sustaining a mutual understanding with corrupt or inept politicians. “Sahana milata sewaya” (service at a concessionary price) was the catchphrase used by them to cover up all their numerous irregularities, wanton wastage, gravy trains, jobs for the boys and massive corruption, mostly with direct and indirect blessings of the politicians.

Here, I’d like to bring out just one example to help readers to get an idea of the enormity of this crisis built up over the past few decades. You’ll only have to look at what seemed like gross over-staffing levels of the CPC’s Sapugaskanda refinery, compared to international standards as shown below:

* Sapugaskanda Refinery – 50,000 Barrels Per Day (BPD); 1,100 employees Superior Refinery, Wisconsin, USA – 40,000 BPD; 180 employees

* Louisiana Refinery (including a fairly complex petrochemicals section), USA – 180,000 BPD; 600 employees

* Hovensa Refinery (now closed) – US Virgin Islands; 500,000 BPD; 2,100 employees.

These are hard facts available on the Internet for anyone to see, but I’m open to being corrected. I doubt if any sensible private investor would even dream of allowing such a level of gross over-staffing in their businesses.

As everyone knows, this is the position in all government business undertakings, as well as in most other government agencies in Sri Lanka. One can say that Sri Lankans have been willingly maintaining a crop of GOWUs (Govt Owned Welfare Undertakings), primarily for the benefit of the “hard-working” employees of these organisations, but at an unconscionably enormous cost to the rest. Obviously, this “party” couldn’t have gone forever!

Will Ranil be up to this challenge? I doubt very much.

UPULl P Auckland

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